Dissolution Flashcards

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1
Q

What is dissolution?

A

Dissolution of a partnership means that the contractual relationsihp joining all of the current partners comes to an end

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2
Q

What governs the arrangements of dissolution within a partnership?

A

It should be the Partnership Agreement, but failing that the PA 1890 provides the details

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3
Q

Where are the events that lead to dissolution outlined?

A

PA 1890 s32-35 though these provisions may be excluded by agreement

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4
Q

How can a notice of dissolution be given, and what is a ‘partnership at will’?

A

A notice of dissolution may be given by any partner to others.
It need not state a reason, can have immediate effect, and need not be in writing for ‘partnership at will.’

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5
Q

What event causes a partnership to dissolve automatically?

A

Death or bankruptcy of a partner automatically terminates the partnership.

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6
Q

Can a partnership be dissolved by a court order, and on what grounds?

A

Yes, a court can order dissolution under PA 1890, s 35.
Grounds include the ‘just and equitable’ ground, which gives the court wide discretion.
Court intervention is rare, as most partnerships can be dissolved without it.

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7
Q

What are the circumstances under which a partnership might dissolve due to illegality?

A

If it is illegal to carry on the business of the partnership, the partnership will dissolve under PA 1890, s 34.

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8
Q

What happens upon the expiry of a fixed term in a partnership agreement?

A

A partnership dissolves unless the agreement provides for continuance after the fixed term. If partners continue, it becomes a partnership at will with terms consistent with that type.

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9
Q

Under what circumstances can a court order dissolution be sought?

A

A court order may be necessary when a partnership agreement prevents dissolution without unanimous agreement.
This might occur when the agreement stipulates a long fixed term or the joint lives of partners without provisions for retirement or expulsion.

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10
Q

What role does a charging order play in dissolution, and when might partners give notice of dissolution?

A

A charging order may be given if a partner’s share is charged for a private debt.
Partners have the right to give notice of dissolution if the creditor enforces the charge by obtaining a court order for the sale of the partner’s share in the assets.

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11
Q

How does dissolution impact the division of partnership assets?

A

Dissolution results in the winding up of the firm

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12
Q

Why is it generally inappropriate to rely solely on the Partnership Act 1890 for determining the duration and dissolution of a partnership?

A

Partners typically prefer to avoid the insecurity of a partnership at will and want to prevent the death or bankruptcy of one partner from causing an automatic dissolution. It is advisable for the partnership agreement to make express provisions regarding the duration and potential dissolution

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13
Q

What provisions should a partnership agreement include if dissolution occurs due to the departure of one partner, and the others intend to continue the partnership?

A

The agreement should include provisions allowing the remaining partners to purchase the share of the departing partner.
It should fix the terms of the purchase to avoid uncertainties.

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14
Q

What happens if the partnership agreement lacks provisions for the purchase of an outgoing partner’s share?

A

Parties may need to negotiate terms for purchasing the outgoing partner’s share.
Without agreement terms, it may take some time to settle a price.
If the agreement doesn’t address payment for the use of the former partner’s share since departure, the former partner is entitled to receive either 5% interest per annum on the share’s value or a court-ordered sum representing the share of profits attributable to the use of the former partner’s share (PA 1890, s 42).

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15
Q

How can the entitlement of the former partner to receive interest or a share of profits be excluded?

A

The purchase agreement can explicitly exclude the former partner’s entitlement to interest or a share of profits attributable to the use of their share (PA 1890, s 42).

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16
Q

What happens if partners can’t agree on continuing the business and buying an outgoing partner’s share during dissolution?

A

There must be a business disposal.
Sale proceeds pay off creditors and distribute entitled amounts to partners.
Section 39 of PA 1890 allows partners to insist on disposal and payment, even by applying to court if needed.

17
Q

Why is breaking up a business and selling assets separately less financially advantageous than selling it as a going concern?

A

Valuable asset goodwill is compromised.
Goodwill includes the benefit of business reputation, connections, and established momentum for ongoing profits.
Financially, it’s crucial for someone taking over the business as a going concern, including paying for goodwill, especially for a departing partner

18
Q

How is goodwill commonly valued in partnership dissolution?

A

Goodwill is often valued based on a few years’ profit. For instance, taking two years of profit (e.g., £25,000 and £30,000) might value goodwill at £55,000.

19
Q

What is goodwill, and why is it a significant business asset?

A

Goodwill is the benefit of business reputation, connections, and established momentum.
It’s significant as it contributes to ongoing profitability and is a valuable business asset.

20
Q

What should be considered when selling goodwill during partnership dissolution?

A

Aside from finances, selling goodwill often involves the buyer requiring a restraint of trade covenant.
This covenant restricts sellers from engaging in competing businesses immediately after the sale.
The validity of this restriction depends on its reasonableness in the circumstances.

21
Q

Why is a restraint of trade more likely to be upheld when selling goodwill?

A

Courts are more likely to uphold a restraint of trade when it protects the buyer of a business rather than restricting the activities of an individual partner leaving an ongoing business.

22
Q

What is the sequence of distributing proceeds following the sale of a business or its assets in the absence of an agreement to the contrary?

A

The sequence, as per PA 1890, s 44, is as follows:
Creditors of the firm (excluding partners) must be paid in full.
If there’s a shortfall making the firm insolvent, partners share the loss from their private assets based on the partnership agreement.
Partners who lent money to the firm are repaid, along with entitled interest.
Partners receive payment for their capital entitlement.
Any surplus is shared among the partners based on the partnership agreement.

23
Q

What happens if there is a shortfall and the firm becomes insolvent during the distribution process?

A

Partners must cover the balance from their private assets.
The loss is shared among partners according to their partnership agreement.

24
Q

What is a potential consequence for a partner who does not want the partnership to be dissolved during the distribution process?

A

An example in Hurst v Bryk [2000] 2 All ER 193 illustrates that the partner opposing dissolution may still be liable for their share of partnership debts under s 44.

25
Q

Who has the authority to wind up a firm’s affairs following dissolution, as per PA 1890, s 38?

A

Each partner (except a bankrupt partner) retains the authority to act for winding up the firm’s affairs.

26
Q

In what situations might there be a need for external involvement in the dissolution process?

A

Disputes between partners.
Assets are in jeopardy.

27
Q

Who can apply to the court for the appointment of a receiver or receiver and manager in the dissolution process?

A

Any partner.
-Trustee in bankruptcy of a bankrupt partner.
-Personal representatives of a deceased partner.

28
Q

What roles can a court-appointed receiver play in dissolution?

A

-Deal with assets.
-Conduct business (receiver and manager).
-Possibly sell the business as a going concern.

29
Q

Is the receiver or receiver and manager entitled to remuneration, and if so, from where?

A

-Yes, the receiver is entitled to remuneration.
-Remuneration comes from partnership assets, not from partners’ personal funds.
-The receiver or receiver and manager is considered an officer of the court.